Primary Market Sales
New shares created
issuer receives proceeds from sale
public offerings: registered with SEC; sale made to investing
... [Show More] public
private offerings: not registered; sold only to limited number of investors with restrictions on resale
Secondary Market Sales
existing share owner sells to another party
issuing firm doesn't receive proceeds, is not directly involved
Issuance Process
Issuing firm > lead underwriter > investment banker A, B C, D > private investors
the company goes from private to public and has to disclose information to investors
IPO - Initial Public Offering
DEO - Seasoned Equity Offering: sale of additional shares by a company whose stock is traded already
Assume that IBM decides to issue additional shares. The sale by IBM of new stock to the public would be a(n)
A. short sale.
B. seasoned equity offering.
C. initial public offering.
D. secondary market transaction.
B. seasoned equity offering
Overall purpose of Financial Markets
facilitate low cost investment
bring together buyers and sellers at low cost by reducing information costs associated with investing
provide adequate liquidity by minimizing time and cost to trade and promoting price continuity
set & update prices of financial assets
Direct Search Markets (eg. Craigslist)
buyers and sellers locate one another on their own
Brokered Markets (eg. primary issuance; real estate)
3rd party assistance in location buyer or seller
Dealer Markets (eg. most bond trading; NASDAQ)
3rd party acts as intermediate buyer/seller
Auction Markets (eg. NYSE)
brokers and dealers trade in one location, trading is more or less continuous
Market order
execute immediately at the best price
bid price: at which a dealer is willing to purchase
ask price: at which a dealer will sell
Price-Contingent Orders
limit orders: order to buy or sell at a specified price or better
stop order: becomes a market sell or buy order when the trigger price is encountered
If price falls below the limit....
limit buy order
stop-loss order
If price rises above the limit....
stop-buy order
limit sell order
Want to buy Intel. Believe current price is at the "fair" value. Want it done quickly and cheaply. What type of trading order?
Market order
Want to buy, but believe current price is too high. Would buy if price is 5% lower. What type of trading order?
Limit buy
Want to sell the stocks you already have. Believe the price will rise. Want to protect yourself against the risk of a big loss. What type of trading order?
Limit loss
You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gains may be protected by placing a ______
A. stop-buy order.
B. limit-buy order.
C. stop-lose order.
D. limit-sell order.
C. stop-lose order
Electronic Communication Networks (ECNs)
allow direct trading without market makers
1969: Instinent (first ECN) established
1975: Fixed commissions on NYSE eliminated
1994: NASDAQ scandal > ECN quotes are displayed
1997: Min tick size from 1/8 to 1/16 of $1
2001: Min tick size $0.01
2006: NYSE acquires Archipelago Exchanges and renames it NYSE Arca
Algorithmic Trading
use of computer programs to make rapid trading decisions
high-frequency trading: uses computer programs to make very rapid trading decisions in order to compete for very small profits
Dark Pools
ECNs where participants can buy/sell large blocks of securities anonymously
Blocks: transactions of at least 10,000 shares
Buying on Margin
Borrowing money to purchase stock
Margin
portion of your investment that is actually provided by you
Margin = Equity = Net worth
% Margin
Equity/Security value
Initial Margin (IM)
min. set by Federal Reserve under Regulation T
currently 50% for stocks
% IM is min. % initial investor equity
(1-%) is max. % investor can borrow
Maintenance Margin (MM)
minimum amount equity
investor will receive margin call when stock price falls too much
Margin Call (MC): notification from broker you must put up additional funds or have your position liquidated
Buy 100 shares on margin of a $50 stock
%IM (Initial Margin): 60%
IM=?
How much can borrow from broker?
IM=$5000x60%=$3000 (equity (margin))
Borrow $2000 (debt)
1. 5000-3000 = 2000
2. (1-.6)*5000 = 2000
You purchased 1000 shares of CSCO common stock on margin at $19 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.
A. $12.86 B. $15.75 C. $19.67 D. $13.57
D. (1000p-$19x1000x50%)/(1000p)=30%, p=$13.57
An investor buys 500 shares of stock at $40 per share, using a margin of 75%. The stock pays annual dividends of $0.25 per share. A margin loan can be obtained at an annual interest cost of 4%.
a. Determine what return on invested capital the investor will realize if the price of the stock decreases to $36 by the end of the year?
b. Compute the return one would have earned if establishing the same position without using margin.
see slides 27-28 [Show Less]